A November 21 filing made by a Google (NASDAQ:GOOG) subsidiary in the Netherlands revealed that the company avoided paying $2 billion worth of income taxes to several European governments in 2011. According to the documents seen by Bloomberg, Google funneled $9.8 billion in revenue, or approximately 80 percent of its pre-tax profits, to a Bermuda shell company.
This is not a new strategy for the company; the amount of money Google has moved to its Bermuda unit has doubled in size over the past three years.
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Are Google’s Actions Illegal?
Governments in France, the United Kingdom, Italy, and Australia are investigating Google’s tax practices as means to increase state revenue during a hard economic climate. As the European Commission’s tax commissioner Algirdas Semeta said at a conference in Brussels, tax evasion and avoidance cost the European Union 1 trillion euros, or $1.3 trillion, per year.
To avoid European income tax rates that range from 26 percent to 34 percent, Google has used two tax shelter strategies known as the Double Irish and the Dutch Sandwich, as Bloomberg reported. By channeling funds to a unit located in Bermuda through subsidiaries in Ireland and the Netherlands, the company arranged a tax rate of only 3.2 percent.
While the EU has begun to analyze Google’s accounting methods, the company has not broken any tax laws. When questioned by the publication, Google stated that the company complies with the tax rules in all the countries in which it operates, and in the United States and many other countries Google’s tactics are not illegal. However, the European Commission, the executive body of the EU, has suggested that member states adopt regulations that would prevent tax avoidance and evasion.
But Google is not the only multinational corporation to draw the attention of European governments for its accounting methods. The Telegraph reported on Sunday that Microsoft (NASDAQ:MSFT) paid no taxes in the United Kingdom on 1.7 billion pounds of online sales revenues, and Starbucks (NASDAQ:SBUX) pledged to pay an additional 20 million pounds over the next two years to end its own tax evasion allegations.
CHEAT SHEET Analysis: Does “Honest Accounting Govern Google’s Books”?
One of the core components of our CHEAT SHEET Investing Framework requires companies to have zero evidence of accounting manipulation. In this case, Google has not broken any tax laws in the European Union, but its accounting methods have drawn the attention of the bloc’s governing body. As Tax Research director Richard Murphy told Bloomberg, “The political awareness now being created in the U.K., and to a lesser degree elsewhere in Europe, is: It’s us or them. People understand that if Google doesn’t pay, somebody else has to pay or services get cut.” In this environment, Google’s current tax rates are deemed to be a “deep embarrassment” to governments across Europe. Therefore, it is likely that the European Union will amend tax laws in the near future, closing the loophole that allowed Google to pay a minimum amount of taxes.